Abstract
This paper studies how tax incentives affect the exchange rate response of prices within multinational firms. Using Mexican customs data from 2011–2020, I compare related-party and arm’s-length export prices across destination tax regimes. In lower-tax destinations, related-party exports exhibit 24.4 percentage points higher exchange rate pass-through than arm’s-length exports, while the difference is small and insignificant in higher-tax destinations. This pattern becomes stronger as the tax gap between Mexico and the destination widens and is also present around changes in tax incentives and U.S. monetary policy surprises. In contrast, I find no clear response in export quantities. During the 2015–2016 peso depreciation, the estimated pricing response added 1.8–2.3 percentage points to measured MNC export pass-through across quarters and lowered dollar-equivalent export prices by 0.7%. The results show that part of the exchange rate response observed in border prices can reflect tax-motivated transfer pricing rather than changes in the quantity of goods exported.
with Volodymyr Lugovskyy and Beverly Mendoza